As a third country, UK exports will also face potential regulatory barriers at the border, as set out in the EU Blue Guide"on the implementation of EU product rules", notably in sections 2.4 (products imported from countries outside the EU) and 7.3 (Control of products from third countries by customs).

Definition of Third CountryNote that the Blue Guide refers to the “Union market”. However, section 2.8.2.1 of the Blue Guide states:

"For the purpose of the EEA Agreement references to the Community (now Union) or the common market in the EU/EEA acts are understood to be references to the territories of the Contracting Parties. Accordingly, a product is not only placed on the Union market, but on the EEA market (i.e. the national markets of the Member States and Iceland, Liechtenstein and Norway)"

In other words, the EEA agreement extends the "internal market" of the EU-28 to the three EFTA EEA states. With regards to EU product rules (as defined in the Blue Guide), EFTA EEA states are not treated as third countries. Hence, we are now looking at regulatory barriers that arise from leaving the Single Market, rather than leaving the Customs Union.

Presumption of conformityTheBlue Guide states that compliance with European harmonised standards is the basis for lawfully placing products on the market, whether they are EU products or third-country products:

"The basic principle of EU product rules is that irrespective of the origins of the products, they need to be compliant with the applicable Union harmonisation legislation if they are made available on the Union market. Products manufactured in the EU and products from non-EU countries are treated alike." (Section 2.4, page 20)

“products manufactured in compliance with harmonised standards benefit from a presumption of conformity with the corresponding essential requirements of the applicable legislation” (Section 1.1.3, page 8)

Products from third countries benefit from “presumption of conformity” if they are manufactured in compliance with European harmonised standards (as produced by CEN, CENELEC or ETSI). There is no requirement for third countries to implement the EEA acquis or even adopt European harmonised standards (EN standards) as their national standards. This is highlighted in the US Trade Department Report for 2016 (page 140):

"Products sold in the EU must comply with the essential requirements of relevant European legislation ... conformity with European regional standards (called European harmonized standards or ENs) provide the method by which such requirements can be fulfilled. If a manufacturer uses the ENs referenced in the Official Journal of the European Union under the relevant legislation, its products are presumed to be in compliance with the requirements. The CE mark is applied ... and ... is a key indicator that the product complies with EU legislation, enabling the free movement of products within the European market."

In theory, it is possible to show compliance with the essential requirements of European legislation bu using other recognised international standards (in line with Article 2.4 of the WTO TBT Agreement). In practice, as the US Trade Department Report for 2016 also highlights, the EU imposes barriers to use of alternative standards:

"..if a manufacturer chooses not to use an EN, it needs to assemble a technical file through a costly and arduous process indicating how the product meets the essential requirements ... there is no predictability that EU or Member State authorities will treat the product as conforming with essential requirements on the basis of that file. As a result, U.S. producers often feel compelled to use the relevant EN for products they seek to sell on the EU market, even if the U.S. products are produced according to relevant international standards providing similar or even higher safety levels."

By virtue of membership of the EU and CENELEC, the UK already has harmonised EN standards as national standards. Even after leaving the Single Market, UK manufacturers will continue to benefit from presumption of conformity from continued use of EN standards.

Declaration of Conformity
The topic of conformity assessment and EU product rules is covered in great detail in a series of excellent posts by @andrewchapman50 on his "Door To Freedom" blog.Chapman's post "conformity assessment and the wto option (part 1)" describes how EU product Directives and Regulations all use the 8 basic Modules (A – H), defined in Framework Decision 768/2008/EC. The great majority of products (possibly as high as 95%) are covered by Module A, where the manufacturer performs conformity assessment, self-certifies and attaches the CE mark. The remaining modules (covering the small minority of remaining products) require the involvement of a Notified Body in the assessment procedure.Chapman's second post on WTO option & conformity assessment demonstrates that for the great majority of products (i.e. covered by Module A), UK manufacturers will still be able to self-certify, attach the CE Mark and issue a Declaration of Conformity after leaving the Single Market, just as they do today. Chapman's third post on WTO option and conformity assessment addresses the small minority of products which require the involvement of a Notified Body. The manufacturer still attaches the CE marks and issues a Declaration of Conformity, but must also declare the details of Certificates issued by Notified Bodies. Chapman points out that on leaving the Single Market, UK Notified Bodies will no longer be recognised by the EU, but suggests it is highly unlikely that existing certificates will suddenly lose their validity at Brexit (re-confirmed in Chapman’s response to Richard North’s blog). Chapman also points out that UK Notified Bodies could still continue to assess products for the EU market, provided they have a subsidiary or sub-contract relationship with a Notified Body located inside EU territory (which most already have). This is of course assuming the EU will not enter into a Mutual Recognition Agreement (MRA) on conformity assessment, which means UK notified bodies and their certificates would continue to be recognised in the EU (and vice versa).On leaving the Single Market, conformity assessment activities within the UK for manufactured products exported to the EU will remain essentially unchanged.Role of Importer

A key difference for manufactured products from third countries is the requirement to use an EU-based importer :

"For products imported from countries outside the EU, Union harmonisation legislation envisages a special role for the importer. The latter assumes certain obligations which to some extent mirror the obligations of manufacturers based within the EU" (Blue Guidesection 2.4, page 20)

"The importer is a natural or legal person established in the Union who places a product from a third country on the EU market" (Blue Guidesection 3.3, page 33)

The importer must also: (i) ensure his own name, trade name/mark & address is on the product, packaging or documentation; (ii) retain a copy of the manufacturer’s Declaration of Conformity (typically for up to 10 years); (iii) provide the manufacturer's technical documentation upon request.

The Blue Guide (page 33) states that importer obligations do not imply importers undertake physical control/testing of the products themselves. In a few cases, EU harmonised regulations require sample testing of products already placed on the market - this is normally an obligation on the manufacturer, but in the case of third country imports, sample testing is arranged by the importer, or if necessary, can be undertaken by the importer.

These points are also covered in detail in Chapman's blog posts on conformity assessment. On leaving the Single Market, UK exporters will need to use an EU-based importer. But the obligations of an importer (described in Article R4 of Framework Decision 768/2008/EC), do not seem onerous and could be fulfilled by an import agent, a freightforwarder, an EU-based office or subsidiary of the manufacturer, or even the purchaser himself.

Control of products from third countries
Manufactured goods from third countries are subject to controls at the border under EU product rules:

Customs authorities and market surveillance authorities have the obligation and the power, based on risk analyses, to check products arriving from third countries and intervene as appropriate before their release for free circulation. (Blue GuideSection 2.4 page 20)

Market surveillance ensures products placed on the market are compliant with product rules. Whereas EU/EEA manufactured goods are subject to market surveillance by the relevant national market surveillance authority when first placed on a national market, manufactured goods imported from a third country are subject to market surveillance at the border, as set out in Regulation (EC) No 765/2008 (requirements for accreditation and market surveillance) :

Article 19(1) requires market surveillance authorities in member states to undertake checks on products placed on the market - taking account of established principles of risk assessment, complaints and other information.

Article 27 “Controls of products entering the Community market”. Article 27 (1) requires customs authorities to undertake checks on products from third countries entering the EU in accordance with Article 19(1).

they suspect a serious risk to health, safety, environment or other public interest;

and/or products do not fulfil documentation and marking requirements;

and/or the CE marking has been affixed in a false or misleading manner.

The important point to note here is that customs inspections are intelligence led - consignments are selected for inspection based on risk assessment. Even EU origin consignments may be subject to inspection based on a risk assessment of fraud and criminal activities. Consignments from outside the Single Market are also assessed for the risk of non-compliance with product rules.

Current non-EU imports to the UK provide a useful measure: Customs Declarations are 99% electronic with 96% cleared in seconds; 4% are subject to checks, with clearance standards of 2-3 hours (maximum); the vast majority of checks are documentary checks rather than physical inspections (See HMRC evidence to the House of Commons Treasury Committee). At Dover today, Lorries carrying goods from outside the EU that are subjected to checks are cleared within 45 minutes on average (see Oxera report on Brexit impact on ports).Non-EU imports come from a range of countries with differing national product standards and enforcement regimes. It should be emphasised that EU member state national authorities administer their own customs regime and make their own decisions regarding risk assessments and frequency of checks - this is not dictated by EU regulations. Under the current risk assessment process, customs and market surveillance authorities focus their attention on consumer goods from the Far East and Africa, considered to be high risk for illegal and non-compliant products.So will UK & EU member state authorities decide that a high rate of consignment checking for each other's manufactured goods is required the day after Brexit ? When both parties remain harmonised on EN standards ? When manufacturers / traders have an established track record of product compliance ? Will goods that were acceptable the day before suddenly be deemed high-risk, requiring diversion of customs/market surveillance resources away from "high-risk" prducts from Asia/Africa at the same time impacting on supply chains your own country relies upon ? It seems unlikely to me that existing UK-EU trade in manufactured goods will face a sudden cliff-edge of increased consignment checking at the border.

Market Surveillance co-operation

Co-operation is promoted within the Single Market to strengthen Market Surveillance. Regulation (EC) No 765/2008 requires "efficient cooperation and exchange of information" between member states and also with the Commission and relevant agencies (Article 24); between customs and market surveillance authorities within a member state (Article 27). Better information will allow better targeting of "high-risk" consignments from third countries.Interestingly, Article 26 provides for national authorities to cooperate and exchange information with authorities of third countries to promote and facilitate "access to European systems" and "activities relating to conformity assessment, market surveillance and accreditation".

The EU views ”compatibility of market surveillance measures and supervision practices” as a condition for open international trade. For example, the Canada-EU Trade Agreement (CETA) Ch 6 Article 3 states “The Parties shall strengthen their co-operation in the areas of technical regulations, standards, metrology, conformity assessment procedures, market surveillance or monitoring and enforcement activities in order to facilitate the conduct of trade between the Parties, as laid down in Chapter XXX (Regulatory Co-operation).”

By virtue of current EU membership, the UK already has close co-operation with other national authorities and is aligned in conformity assessment procedures, market surveillance, monitoring / enforcement activities. Continued co-operation post-Brexit would aid in risk-analysis targeting and maintaining mutual trust - assuming the EU is willing to reach agreement.

Exceptions

While the Blue Guide applies to most products covered by EU regulations, there are some exceptions:"The Guide does not attempt to cover ... Union legislation on motor vehicles, construction products, REACH, and chemicals" (section 1.5).

In these exceptional cases, typically product registration is required with an EU agency or a notified UK authority recognised by the EU. Outside the Single Market (and assuming EU do not agree to mutual recognition of registrations), UK exporters will need to use an EU-based operator/representative to register products (not dissimilar to the role of importer described above).

Conclusions

In summary, navigating the EU's product rules from outside the Single Market is relatively straightforward: continue using EN standards; use an EU-based importer; UK Notified Bodies should establish sub-contractor or subsidiary relationships with EU-based bodies. Agreements with the EU for continued co-operation on market surveillance and an MRA on conformity assessment would be beneficial to both parties - but the lack of them does not provide an insurmountable barrier. There is no reason to expect UK-EU manufactured products to be classified as "high-risk" for non-compliance, hence no reason to expect an upsurge in consignment checking for manufactured products on Brexit day one.

While there are some exceptions to the general approach laid out in the Blue Guide, similar mitigation is available for these cases. The details of navigating these exceptions from outside the Single Market will be the topic of my next post.

Monday, 24 July 2017

It
is perhaps surprising that so much attention has been given to the
Single Market, yet so little attention has been paid to the EU
Customs Union. Particularly as leaving the EU Customs Union has
potentially greater impacts on UK trade than leaving the Single
Market.

In
my previous posts, I looked at how leaving the Customs Union results
in:

UCC
Article 39 states AEO status can
be granted to any economic operator meeting the
criteria. UCC
Article 38(7) states AEO status can be granted to operators “
outside
the customs territory of the Union” where
the EU recognises thethird country customs legislation as equivalent.

Common Transit ConventionThe
EFTA states, EU-28, Turkey, Macedonia & Serbia are
signatories
to this convention,
which
allows
the movement of goods though these states with customs formalities
(payment of duties and VAT) suspended until the goods either reach
their destination or are exported outside
the territories of the signatories,
avoiding
stops
/ checks at every frontier crossed en-route. Note
that UK will remain a signatory to TIR
(Transports Internationaux Routiers, International Road Transport),
a United Nations Economic Commission for Europe (UNECE) initiative
pre-dating the EU, covering over 50 countries (including the EU-28)
which also allows transit with suspension of customs formalities.
TIR cannot be used for movements within the EU, but is used for
movements involving third countries and the EU

Road
HaulageUnder
the currentEU
Community Licensing scheme,
truck
drivers are licensed to drive throughout Europe without the need for
permits at every border. The
Road Haulage Association (RHA) have proposed a Land
Transport Agreement
to allow continued
unfettered international road haulage for licenced UK and EU
operators. The
proposal excludes cabotage
as the RHA does not believe the EU will allow UK haulage operators
to compete for domestic haulage business
within
EU member states.

Continued
Customs Co-operation
will be a crucial element of maintaining trade.

The
“Ready
on Day One”
report
includes a foreword by Xavier Bertrand (President of the
Hauts-de-France Region), in
which he speaks
warmly of a
new Entente Cordiale in the context of a positive trading
relationship, recommends
that Calais & Dover work together and emphasises
that however
Brexit pans out “local
and regional partners of the past will remain neighbours
and partners in the future”.
He also
suggests
extending
the Le Touquet Treaty
to cover customs & goods in each other's territories.

There
are other areas where agreements could minimise the impact of
introducing customs formalities, especially for the Irish border &
SME's, including :

Expand
the AEO scheme to a trusted trader scheme and extend the benefits to
SMEs, combined with common technology for identification and
reserved/fast-track lanes at customs borders.

Agreement
between HMRC and EU tax authorities to continue current arrangements
to collect VAT and excise away form the border and reconcile in
arrears. Potentially, continue to allow VAT registered companies to
trade with vat registered counterparts on other side of border
without need for VAT payment and subsequent refund.

Special
origin status for certified trusted traders each side of the Irish
border where goods are of origin within either of the UK/RoI jurisdictions. Allow fast-track of these consignments across the border and avoid Rules
of Origin paperwork.

Special
transit status for freight movements within the island of Ireland.

Staying
in the Customs Union ?

There
has
also been
much discussion of the
UK remaining
in the customs union in order to avoid
the impact of a new customs border. But
is this realistic? Peter
Holmes (University of Sussex)
argues that Article 28 of the Treaty
of the Functioning of the European Union
means the EU customs union is the same as the EU itself in terms of
the definition of membership. Countries
like Turkey,
San Marino and Andorra have customs union agreementswith
the
EU, but
they
are not in
the EU's customs union.

Holmes
also points out that to remove a customs border requires more than
just the adoption of the EU's
Common External Tariff: “Any
customs union agreement with the EU would firstly have to be totally
comprehensive to avoid the need for customs checks. The UK would have
to follow all EU trade policies, at the WTO, in bilateral deals and
in anti-dumping.”
The UK
would
have no independent trade policy.

Clearly,
this would not be a suitable long term arrangement. But, as discussed
in my
previous post, we might need an interim Customs Union arrangement
to provide time for implementation of Technology, IT, Infrastructure
and Trade Facilitation measures tomitigate the impact of
customs formalities – March 2019 is not far away for such a
significant logistical challenge.

This
would also be dependent on EU agreement – we cannot simply shadow
the EU's trade policy and demand the EU suspend customs formalities
and rules of origin (as at least one commentator has suggested).
Essentially the EU would be trusting the UK to maintain its customs
border in line with EU policy. The EU would likely demand continued
oversight via OLAF
(EU's anti-fraud body) and European
Court of Auditors (ECA) and may also demand we continue to send
the bulk of import duty collected to Brussels. Any interim customs
union arrangement should be strictly limited to the minimum time
possible.

Does
EFTA EEA help with customs ?

While
many promote the benefits of EFTA EEA, this option does not remove
the need for routine custom controls & formalities:

EFTA's
EEA Factsheet on Free Movement of Goods:
“..whereas
in the EU Customs Union, the EU Member States have abolished customs
borders and procedures between each other, these are still in place
in trade between the EEA EFTA States and the EU, as well as in trade
between the three EEA EFTA States.”

CBI's case study of the Norway option:
“Not
being part of the customs union, EEA EFTA exporters and foreign
companies exporting to them have to go through customs procedures
such as import/export declarations, including rules of origin for
all goods exports and payments of VAT.”

Swedish National Board of Trade Brexit Analysiscomments
on the EEA option: “Customs
formalities would need to be completed though, in connection with
border passage of goods and proof of origin of goods has to be
presented for exemption from customs duty or reduced customs duty. “

Nor
does EFTA EEA provide a comprehensive customs agreement. As
EFTA's web page on Customs Matters
states:
“The
EEA is not a customs union, thus most of the activities in the
customs field are not relevant to the EEA Agreement ….Norway
and Switzerland were able to find simplified solutions through
bilateral negotiations”.

EFTA
EEA Protocol 10-simplified
inspections and formalities for
carriage
of goods. Over
15 of the 24 pages of this protocol are dedicated to Norway's
bi-lateral agreements on customs security measures,
covering
AEO recognition and Entry/Exit
summary declarations. But Article 2.1 also limits the scope of
these customs security measures to EU-Norway – other EFTA EEA
states do not benefit from this.

EFTA
EEA Protocol 11
- mutual
assistance in customs matters. Seven
pages - essentially a
replica of other EU
third country agreements on this topic.

Access to theCommon Transit Convention and the EU
Community Licensing scheme would probably come courtesy of joining EFTA, but would not require rejoining EEA (Switzerland also have access to these schemes). However EFTA EEA does not provide a comprehensive customs agreement. As the
Norway example shows, a UK-EU customs agreement could be added as specific protocols in the EEA agreement – requiring unanimous consent from EFTA EEA
states and the EU Commission. But why choose this route when a
standalone UK-EU customs agreement can be agreed via Qualified
Majority voting in the EU council ? Moreover, leaving EFTA EEA would
mean losing access to protocols in the EEA
agreement, including those holding the UK-EU customs agreement. Which rather neatly proves the theory that those promoting
the idea of EFTA EEA option never actually intend the UK to leave.

Should
the UK wish to pursue a transitional customs union arrangement,
there is another problem as pointed out in Peter
Holmes article – Article 56/3 of the EFTA Convention requires
EFTA members to harmonise their third country FTAs – which clashes
with the need to align with EU third country FTAs while in a customs
union. After leaving the EU, the UK can have a transitional customs
union arrangement – or it can join EFTA EEA – but not both.

Conclusion

There
is a wide range of agreements needed in forming a comprehensive
customs agreement with the EU that will minimise the impact of
customs formalities. The UK could enter into a customs union
agreement with the EU (assuming the EU agree) but that would mean no
independent trade policy - this might just be needed as a short-term
interim agreement, but should be limited to the minimum time
possible.

The
EFTA EEA option does not avoid the need for a customs border with
customs formalities. Nor
does EFTA EEA provide a comprehensive customs agreement – and
embedding a UK-EU customs agreement into the EEA agreement means that
agreement would be lost when we left EFTA EEA. Furthermore, an interim customs union agreement is not compatible with EFTA membership.

The
primary feature of EFTA EEA is regulatory harmonisation with the EU.
EFTA EEA imports to the EU are still subject to routine customs
controls and checks based on risk assessment (fraud, criminal,
security etc), but EFTA EEA imports are essentially regarded as being
zero-risk of regulatory non-compliance in the risk assessment
calculation. Food safety regulations are also harmonised, meaning
EFTA EEA imports are not subject to border inspections (although
other third countries such as Switzerland, Chile, New Zealand have
equivalence agreements which remove or reduce the need for border
inspections for food safety).

Regulatory
harmonisation is the point at which we move away from discussing the
impact of leaving the Customs Union to discussing the impact of
leaving the Single Market – which will be the topic of my next
post.